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The Link … (Part 2)

The Link … (Part 2)

Issues to be addressed in this research paper

In early January I wrote a research paper called The Link between Demographics, Inflation, Consumer Spending and Equity Returns. This research paper is the second part of that paper, and will look into which investment strategies I expect to be the most rewarding, given the demographic picture which is laid out in front of us.

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A brief recap of my findings in the earlier paper

Some relevant observations from the earlier paper:

  1. Total consumer spending, when measured as a percentage of GDP, is much higher in the U.S. than it is in Europe, because most healthcare spending counts as consumer spending over there whereas, here in Europe, it counts as government spending.
  2. In most developed markets, total spending of the average consumer peaks when the main income earner of the household is in the mid-40s.
  3. The 45-49 and the 50-54 year olds are the largest age groups in most developed markets (‘DM’).
  4. Consequently, overall consumer spending has already peaked in many DM countries, which may explain why the global economy is struggling to gather economic momentum, following the Global Financial Crisis.
  5. At first glance, it appears that consumer spending falls more with age in Europe than it does in the U.S., but that is a function of the elderly spending so much on healthcare, which counts as consumer spending in the U.S.
  6. Consumer spending is not only a function of age but also of income, and spending tends to peak a few years later for higher income earners.
  7. Americans spend more of their GDP on healthcare than Europeans do, mainly because the private insurance model in the U.S. is less cost effective.
  8. The average age of the population affects not only consumer spending, but also inflation, as older consumers spend less and save more.
  9. There appears to be a strong link between the demographic profile of a country and overall equity returns.

The knock-on effects

As I concluded in Part 1, slowing consumer spending will have a string of knock-on effects. All other things being equal, GDP growth will be significantly lower, although countries will be affected differently. Inflation will most likely remain subdued, and interest rates should therefore also stay comparatively low.

Equities will almost certainly deliver disappointing returns overall, although industries are likely to be affected very differently, as some will outright benefit from ageing, whereas others will suffer. In the following, I will try to identify investment strategies that I believe will do relatively well in the environment that I project. Two observations:

  1. This paper will focus mostly (but not exclusively) on alternative investment strategies. By doing that, I am not about to suggest that attractive investment opportunities cannot be found in the traditional space, but alternatives are what we do at Absolute Return Partners.
  2. Low equity beta strategies are the focus of Absolute Return Partners, so that is where I will zoom in We define a low equity beta investment strategy as a strategy that doesn’t correlate with equities by more than 0.2. As equity returns overall are likely to remain relatively low in the years to come, strategies such as equity long/short will likely struggle. That doesn’t imply that all equity long/short funds are likely to do poorly; not at all, but the universe of equity long/short funds will most likely disappoint.

The obvious winner

Healthcare (broadly defined) is the industry most likely to benefit from an ageing population. Healthcare expenditures will almost certainly grow exponentially as society ages, regardless of country. Example: The average person is as expensive for the healthcare system during the last 12 months of his/her life, as he/she has been up to that point over the entire lifetime. (Source: The Danish National Health Service.)

Chart 1: Total healthcare spending as % of GDP, 1960-2010 (all OECD countries)
Chart 1: Total healthcare spending as % of GDP, 1960-2010 (all OECD countries)
Source: The King’s Fund (2013), OECD (2012)

Healthcare spending as a % of GDP started to rise many years ago (Chart 1), long before ageing became an issue, underlining the fact that ageing is not the only factor that affects the amount of money spent on healthcare. Amongst other things, better and more expensive treatment of most serious diseases has had, and continues to have, a major impact on healthcare spending.

This raises the important question: How much is the cost of healthcare likely to grow in the years to come? The King’s Fund (a U.K. charity) published a very interesting paper back in 2013, which looks into the future, and the results are frightening (Chart 2).

Chart 2: Projected growth in healthcare spending by 2040
Chart 2: Projected growth in healthcare spending by 2040
Source: The King’s Fund (2013), Kibasi et al (2012)

The analysis in Chart 2 calculated a best-fit trend based on past data on healthcare expenditures as a % of GDP for individual countries, then projected the same trend forward to 2040, which resulted in the base case in Chart 2. The grey bars represent an assumption that the future spending trajectory could be slightly higher, given better treatment and resulting higher patient expectations, leading to the 2040 high case.

The King’s Fund went one step further in its analysis. Based on data provided by the U.S. Congressional Budget Office – and assuming ceteris paribus - the 2013 paper projected U.S healthcare expenditures as a % of GDP as far out as 2083 (i.e. 70 years out). Based on its findings (Chart 3), the paper concluded that total healthcare expenditures will amount to almost 99% of GDP by 2083! It goes without saying that all other things won’t be equal by then, and probably long before then. Something will have to give, and that something is probably legislation.

Chart 3: Projected growth in U.S. healthcare spending
Source: The King’s Fund (2013), Congressional Budget Office (2007)

There is a growing realisation that society simply won’t be able to afford the ever rising cost of healthcare. Example: Medicare spent $55 billion on doctors and hospitals in 2009 during the last two months of patients’ lives, and it is estimated that 20-30% of those expenses had no meaningful impact.(Source:

The cost of dying is excessive, and society will (in the not so distant future) be forced to change the current practice of paying with few questions asked. From an investment point of view, the implication is that some healthcare strategies will likely do much better than others going forward. Pricing will most likely be increasingly regulated, and one should therefore be particularly cautious with healthcare strategies that depend on aggressive pricing to succeed.

Pricing on drugs against diseases that kill a large number of people every day (e.g. Alzheimer and cancer) will probably be less regulated but, in the years to come, I would expect much more regulation on drug pricing in general.

Homebuilding and related industries

Homebuilders are a somewhat more controversial choice as a winner of the ‘ageing battle’, and it goes without saying that not all homebuilders will be winners, but a surprising number will, as society is reconfigured to service a much older populace. My thinking is as follows:

The combination of an ageing population and a robust residential property market in recent years will, in many countries, encourage ageing baby boomers to downsize. You no longer need the five or six bedroom house your children grew up in, and downsizing to a two or three bedroom townhouse makes perfect sense. On top of that, you can free up a significant amount of money after years of strong property prices. That could quite possibly create a two tier market - a relatively weak one for the largest private homes, and a much sturdier one for small and medium-sized homes.

In addition to the need for more homes suitable for the elderly (i.e. retirement homes), the need for more nursing homes further down the road will also rise significantly. In the January paper I included a table that listed when (i.e. at what age) spending peaks on various consumer goods and services. Table 1 below is a condensed version of that table, where I have only included consumer goods and services that are somehow related to homebuilding. As you can see below, spending on many of those goods and services peaks surprisingly late in life, potentially making them very attractive as investment objects over the next several years.

Table 1: The age of peak spending on various consumer goods and services
Table 1: The age of peak spending on various consumer goods and services
Source: Dent Research, U.S. Census Bureau

Music Royalties

In the first part of this research paper issued back in January, I wrote the following:

Healthcare products and services are taken up much more widely by the elderly, whereas the largest buyers of music are young people.

Not exactly correct. The middle-aged certainly don’t download or stream as much as the younger generations do, but that is probably more a function of not being used to the newer technologies. Their appetite for music is certainly undiminished, and even the 65+ year olds buy a surprising number of CDs (Chart 4).

Chart 4: The take-up of music by age group
Chart 4: The take-up of music by age group
Source: Virgo Investment Group, Nielsen (2013)

As a large number of baby boomers move into the 55-64 age group over the next few years, music could do surprisingly well, and it is probably only a question of time before that age group embraces the newer technologies as well.

One word of caution: Middle-aged and elderly people buy very different types of music than youngsters typically do. The older age groups buy a much higher proportion of evergreen music, which would make music royalties a particularly attractive area to invest in, as it is so closely associated with evergreen music. In this context, I define evergreen as either classic music or rock/pop music delivered by bands that have been around for a considerable amount of time. Mike and the Mechanics would be a classic example of a British evergreen band, appealing to the middle-aged.


Infrastructure is likely to benefit from ageing – at least indirectly. As is pretty obvious by now, governments around the world are becoming increasingly cash-strapped after years of running large public deficits. To add insult to injury, it is happening at a time where infrastructure upgrades are more needed than ever, following years of neglect - at the very least in the U.S. (Chart 5).

Chart 5: U.S. infrastructure investments
Chart 5: U.S. infrastructure investments
Source: BCA Research (2016)

This has opened the door to the cash-rich pension fund sector, sovereign wealth funds and other pockets of institutional capital, looking for low equity beta investment opportunities in a low return environment. How it will all pan out remains to be seen, but the reality is that governments will need access to very deep pockets in the years to come, and the pension funds will need to boost overall returns – potentially a match made in heaven.

A recent article in the Financial Times (Source: suggested that UK pension funds are already much more alert to the opportunity set, saying that at least 185 pension funds had one or more investments in infrastructure in 2015, up from 136 the year before. The FT article suggested that areas such as energy, water, transportation and social projects are growing particularly rapidly and quoted McKinsey as saying that $57 trillion will be needed globally between now and 2030 to fund those infrastructure projects.

That sort of money would never be available from the types of investors who used to dominate the alternative investment space, but 2008 changed all of that. Today large institutional investors such as sovereign wealth funds, pension funds and endowments dwarf high net worth individuals and family offices in the hedge fund space (Chart 6).

I am obviously aware that infrastructure funds are not hedge funds. Having said that, the general trend away from HNWIs as the largest client base is not only a trend that we see in hedge funds. It is happening across virtually all alternative investment strategies, and infrastructure assets grew the fastest of any alternative strategy last year (see here for details).

Chart 6: The mix of investor types in hedge funds
Chart 6: The mix of investor types in hedge funds
Source: World Economic Forum, Citibank

Other opportunities worth a brief mention

There is a host of other investment opportunities that are likely to emerge as a result of changing demographics - and consequently changing consumer habits. One such opportunity would be the growing use of Apps in almost anything we consumers do – think Uber (the taxi firm) or personal shopping type Apps. My own 81-year old parents and their friends repeatedly surprise me in terms of how frequently they use Apps, and the use of Apps is likely to intensify as they get older and less mobile.

Ageing is also likely to lead to a rapidly rising use of robots – both in industry and elsewhere. Automation of banks here in the UK is already well advanced, with bank customers being able to do most things in front of a computer these days. From an investment point of view, the problem is that the timelines involved in various high-tech alternative investment strategies are often very long (20+ years).

Another obvious beneficiary of ageing would be cruise ship holiday operators, as the biggest spenders on cruise holidays are consumers aged 70. That said, I have no idea whether one can invest in any alternative investment strategy with exposure to this industry, but I am aware of one or two listed companies. More on this topic, as we dig deeper.

Ageing’s impact on liquid alternatives

It is obvious that the investment strategies most likely to benefit from ageing are less liquid in nature. That doesn’t mean that none of the more liquid alternative investment strategies would benefit. I have already mentioned homebuilders as one possible long/short strategy (long in smaller homes and short in larger homes), but other liquid alternative strategies are also likely to do comparatively well.

Take Insurance Linked Securities (ILS); returns are not quite what they used to be, and there is always the inherent tail risk in this strategy, as in all insurance based strategies, but we learned from part 1 of this paper that consumers aged 58 take out more life insurance than any other age group, which essentially means that the life insurance market will grow substantially in the years to come, which will be good - both as far as liquidity and quality (more policies to choose from for investors) is concerned.

The other positive aspect regarding ILS is that, although returns are currently suppressed by low interest rates, it is largely a U.S. market, and we expect U.S. interest rates to recover much more quickly than European rates, making it potentially a very interesting proposition for European investors.

Systematic Macro should also do quite well in the environment I project. Private investors usually make significant portfolio restructurings as they approach retirement (away from equities towards bonds) but, given the very low yields on offer and the poor environment for equities, I would expect lots of confusion amongst these investors, which can only result in rising volatility – something systematic macro funds will inevitably benefit from.


Over the last few pages, I have attempted to identify investment strategies that are likely to benefit from the changing demographic outlook. At the end of the day, though, as is always the case when investing, it is not so much about what will change. Rather, it is about what will change, relative to what investors think will change. In that respect, there will probably be fewer attractive investment opportunities that one would expect in healthcare and more in areas such as infrastructure or music royalties.

Niels C. Jensen

10 February 2016

About the Author

Niels Clemen Jensen founded Absolute Return Partners in 2002 and is Chief Investment Officer. He has over 30 years of investment banking and investment management experience and is author of The Absolute Return Letter.

In 2018, Harriman House published The End of Indexing, Niels' first book.